Tag Archives: Owner Managers

Tax expert Peter Rayney replies to concerns that HMRC may deny entrepreneurs’ relief to shareholders who sell their shares back to the company.

My article, New challenge to entrepreneurs’ relief, was born out of a lecture given by a leading tax barrister based on his experience of entrepreneurs’ relief (ER) claims connected with the purchase of own share (POS) transactions being challenged by HMRC.

The arguments over the validity of these claims haven’t yet reached a tax tribunal, and any revised HMRC guidance is unlikely to be published until after such a tribunal case has been heard.

HMRC’s potential argument is that multiple completion dates used under some POS transactions don’t allow ER to be claimed on the value paid in the second and subsequent tranches.

This is contrary to every learned tax article ever written on this point, as Peter Rayney explains below.

Clearance comfort

When a POS clearance is obtained under CTA 2010, s 1044, this simply confirms that the amount payable to the shareholder under the POS transaction is not treated as a distribution (and is, therefore, subject to capital gains tax). The clearance doesn’t provide any confirmation that ER is available. So the fact that a CTA 2010 s1044 clearance has been obtained is of no real comfort to the taxpayer or his advisers.Legal points
HMRC’s potential argument goes against the currently accepted technical analysis on multiple completion POS transactions. I see that there is a legal point on the concept of whether there is an ‘acquisition’ in the context of a POS. Indeed, I would rely on this very point when it comes to claiming a capital loss on a POS (since there is no acquisition the ‘connected party’ loss rules should not apply).Literal approach
What we have here is HMRC taking a very literal approach to the operation of TCGA 1992, s 28 in a way that was probably never even contemplated by the draftsman or indeed by Parliament. I strongly suspect that the reason why this point is being taken has something to do with the denial of 10% CGT entrepreneurs’ relief to some innocent taxpayer.Established practice
We should be able to rely on a ruling on this issue given back in 1989. In a statement, the Inland Revenue (as it was then) indicated its agreement to a POS being made in instalments, as reported in the ICAEW technical release 745 issued in April 1989. Indeed, para 10 (b) of the release states:‘‘They [the Inland Revenue] take the view that as the beneficial ownership of the shares is regarded as passed at the date of the contract, a disposal for capital gains tax purposes will have taken place by the vendor at that time notwithstanding payments at later dates.’’
As far as I am aware HMRC has not retracted its agreement of this statement, so there must be a reasonable ‘legitimate expectation’ argument to run in relation to multiple completion POS transactions that have already taken place.No avoidance
In my view, multiple completion dates used as part of a POS transaction do not involve any form of tax avoidance. The arrangements simply enable the company to ‘defer’ part of the purchase consideration in a ‘Companies Act’ compliant manner. In fact, under conventional analysis, all the CGT is paid up-front on the basis of the contract date per TCGA 1992, s 28, – so where is the mischief in that!Looking forward
If HMRC’s new argument was ever taken to a tax tribunal, I do hope that the tribunal would take a reasonable balanced – and purposive – view of what is going on here. In my view it is an apparent ‘u-turn’ in HMRC’s tax treatment of entirely legitimate POS transactions just to deny ER.
If HMRC succeed in rewriting the CGT analysis for multiple completions, I suspect that more of us will simply be advising companies to structure their ‘buy-out’ transactions in a way that will deliver the anticipated ER CGT 10% for the ‘exiting’ shareholders. In some cases, it may necessary to use a new company (‘Newco’) as the acquisition vehicle to buy-out the shares of the departing shareholder with the existing shareholders ‘swapping’ their shares under the share exchange rules in TCGA 1992, s 135. But what an unnecessary palaver!

Peter Rayney provides independent tax advice to owner-managed businesses, tax advisers, accountants and lawyers. He also chairs the ICAEW Tax Faculty technical committee and is a CIOT council member

Most owner managers should be reasonably pleased with the key proposals announced in Mr Osborne’s Autumn Statement. As the UK is still grappling with unparalleled debt and the ripples of the Eurozone crisis, they could not really expect any large tax hand-outs.

Following the Autumn Statement, the owner managers’ tax landscape looks relatively unchanged and, more importantly, relatively unscathed. They are still able to extract dividends from their companies at modest tax rates (with a maximum effective rate of 30.6% from 6 April 2013) and spousal dividend planning remains robust. Companies continue to provide effective tax shelters for ‘surplus profits’, enabling those profits to be retained at low corporate tax rates.

In recent years, there has been considerable debate about the use of aggressive partnership structures and the possible legislative weapons that HMRC could use to nullify their effectiveness. Businesses that have opted to use these structures are likely to be concerned about the proposals for a detailed HMRC study in this area. Thankfully, the Government has opted not to introduce yet more complex legislation to tackle personal service companies, although companies vulnerable to IR35 challenges should be prepared for more vigorous HMRC policing in this area.

For larger owner managed companies, business, the planned reduction in the main corporation tax rate to 21% from April 2014 will also be welcomed. Many will ponder whether this will ultimately lead to a single corporation tax rate (and the chance to get rid of ‘associated companies’ (!)). Or will the chancellor be looking to retain a commensurately lower tax rate for ‘smaller’ companies?

Probably the most welcome proposal is the ten-fold increase in the Annual Investment Allowance (AIA) from the current £25,000 to £250,000 from 1 January 2013. This effectively reverses the reduction in AIA to £25,000 that only came in from April 2012 so there are likely to be complications for accounting periods straddling the changeover date. The new £250,000 AIA limit is scheduled to last for a two year period, but will give many owner managed businesses an immediate tax write off on all or most of their capital expenditure. Businesses planning to incur significant capital spending should now wait until the new year.

Pension funds have always been an easy target for tax raids but, in my view, the reduction in the annual allowance to £40,000 and lower lifetime cap from 2014/15 is likely to affect relatively few owner managers. Anecdotal evidence suggests that most of them gave up on traditional forms of pension provision some time ago, preferring to control their own ‘pension’ pot by investing funds through personal investment companies or suitable property investment. A properly structured family investment company still remains a pretty effective vehicle for retaining and controlling wealth.

Many will be dismayed to learn that the Government intends to push ahead with its controversial and impractical proposals to allow shares to be issued to employees in exchange for giving up many of their employment rights. But at least, we now have an announcement that the beneficial rule enabling entrepreneurs’ relief (ER) to be claimed on all post-5 April 2012 EMI options (irrespective of size) will be revised. Thus, for EMI options granted after 5 April 2012, the relevant 12 month holding period for ER will run from the date the option is granted (as opposed to the date when the option is exercised, as was originally proposed). This will enable the benefit of the 10% ER CGT rate to be available for the vast majority of exit-based EMI option schemes.

The owner managed business sector will be thankful that it has avoided the spotlight, which has been reserved for large multinational groups. Following intense media coverage about tax avoidance by a number of multinationals, this sector is likely to bear the brunt of HMRC scrutiny. The Treasury clearly believes there are substantial tax revenues waiting to be collected in this area.